Verizon to Buy AOL for $4.4 Billion

Ishmael · 2015-05-12T20:00:17+00:00

The nation's biggest wireless operator sees its digital future in a company that still offers dial-up Internet service. However backward that may seem, Verizon Communications' $4.4 billion all-cash deal for AOL, announced on Tuesday, illustrates how the communications industry has changed - even if the underlying rationale has not - from the days when the Internet pioneer told users "You've got mail." AOL may be known for its dot-com rise and fall and for current web content like The Huffington Post, but Verizon is looking to gain the company's powerful but little-known mobile video and advertising technology. That could make Verizon's own phone and Internet offerings more appealing to consumers, and to advertisers. The motive is clear. Consumers are increasingly watching videos - from YouTube to HBO - on mobile phones, tablets and laptops. And big media companies and advertisers are only beginning to grapple with this rapidly evolving market. By layering AOL's technology atop its 109 million wireless connections and growing cable television business, Verizon is betting that it can make billions of dollars by selling ads against streaming video. "They know that mobile is where it's at if you want to get millennials," said Kathryn Winsted, a professor at Pace University's Lubin School of Business in New York. "They may sell ads, they may sell subscription content, but they need to figure out this market." The deal comes during a broader shift among big television and phone companies, which are once again looking to marry content and distribution under the same roof. The phone companies in particular are under pressure, as growth in their core wireless businesses has slowed. Comcast, the biggest cable operator, acquired NBCUniversal, the big television and movie studio company. AT&T, Verizon's nearest rival, is acquiring DirecTV, the satellite television business. And Sprint, another wireless operator, is making its own forays into content. "The telecoms are clearly saying, ‘We're not going to be dumb pipes,' " said Jonathan Miller, the chief executive of AOL from 2002 to 2006, who is now a venture capitalist. Yet in acquiring AOL, Verizon gets more than just new advertising technology. It also takes ownership of a company with a troubled legacy and a muddled present. AOL operates the dwindling but still profitable dial-up Internet business, runs a collection of news websites and employs big personalities including Arianna Huffington and its chief executive, Tim Armstrong. With AOL, Verizon will be looking to find new ways to make money from its existing customers. One way to do this is to offer bundles of content, and to sell ads, all of which means consumers will use more data. Verizon has already made some inroads on these fronts. An early effort to offer television programming via phones, called V Cast, was shut down, as was a partnership with Redbox intended to rival Netflix. A more successful and enduring venture is a deal with the National Football League that lets Verizon subscribers stream games free. Advertisement Continue reading the main story Verizon has also tried to move deeper into the advertising market, although it stumbled with a mobile ad-targeting program that was scrutinized by privacy advocates, and a sponsored news website that was widely panned. And under the leadership of Lowell McAdam, Verizon's chief executive, the company has stepped up its investments in video. It has poured money into LTE Multicast, a technology for broadcasting live video over its network. Last year, it bought the intellectual property and assets of Intel Media, the digital TV division of the chip maker Intel. And in late 2013, Verizon also announced the acquisitions of EdgeCast, a content delivery network, and the assets of upLynk, a video streaming company. Whether AOL is enough to give Verizon an edge in the advertising and content businesses remains to be seen. "It isn't enough by itself, and it isn't meant be the only thing," Mr. Miller said. "If you're really going to compete with Google and Facebook on ad sales, you have a lot of investment to make. You have to put money behind this." The price Verizon is paying is a mere fraction of the $165 billion that AOL spent on Time Warner in 2000, an ill-fated merger struck at the peak of the dot-com boom. Verizon now has a market value of more than $200 billion, making Tuesday's "It's the tip of the tip of the tail, and it is clearly not going to wag the whole dog," analysts with MoffettNathanson wrote in a note. "Verizon is still, first and foremost, a wireless phone company." The AOL that Verizon is buying is a shadow of its former self, managing a small collection of media and technology properties. It was spun off from Time Warner in 2009, and today its most visible brand is The Huffington Post, a network of domestic and international news sites run by Ms. Huffington. In recent months, AOL considered spinning off The Huffington Post. It is unclear how Verizon's acquisition will affect those plans. Moreover, Verizon could quickly dismantle its new acquisition, selling off smaller units including the dial-up Internet business. Whatever it does with the peripheral pieces of AOL, it is clear that Verizon's focus is on the video and advertising technology. "Verizon's vision is to provide customers with a premium digital experience based on a global multiscreen network platform," Mr. McAdam, Verizon's chief executive, said in a statement. "This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience." Verizon covets two main pieces of AOL's mobile and video technology offerings. One is its big network of original video content, which is home to lucrative online video advertising. The other is its so-called programmatic advertising business, a system that matches online advertisers with consumers across different platforms, and collects valuable data along the way. AOL last month revealed a new version of this product, called One, placing it in ever more direct competition with Google and Facebook. And already, AOL has found success, with big companies including Bank of America, General Motors and Verizon signing up for the product. "The world is going mobile, and it is going there really quickly," Mr. Armstrong, AOL's chief executive, said in an interview. "The combination will give us a big chair at a big table. We have assets that can cleanly plug in and scale on top of Verizon's platform." AOL and Verizon have been partners on several projects in recent years. Last summer, at the Allen & Company retreat in Sun Valley, Idaho, Mr. McAdam and Mr. Armstrong shared a lunch, where they began acquisition talks. It was at that same Sun Valley conference in 1999 that the chiefs of Time Warner and AOL first discussed their merger. Much has changed since then. But 16 years later, the rationale for Verizon's acquisition of AOL is strikingly similar. Once again, the way consumers are consuming content and advertising is undergoing an epochal change. Once again, big companies are striking hasty deals in a bid to navigate the future. But instead of aiming at desktop computers, Verizon and AOL want to put content and new advertising technology on today's most ubiquitous computing device, the mobile phone. "The logic is clear, and it's the same logic as AOL and Time Warner," Mr. Miller said. "The logic then was to put to together content, distribution and access, and it still is. It's the same today." Source: nytimes

Thread starter Ishmael
Start date May 12, 2015

Ishmael

JF-Expert Member

May 12, 2015

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